Sector Rotation in 2025–26: Which Sectors Are Lagging, Why It’s Happening, and Where Smart Traders Look for Opportunities

An evidence-based guide from CLiK Trading Education. All performance figures updated as of late 2025.

Black-and-white sector rotation diagram showing how different industries outperform at various stages of the economic and market cycle.

Sector rotation is one of those timeless concepts in market analysis: as the economy moves through cycles, different sectors take turns outperforming or lagging. But understanding why a sector is lagging — and whether that weakness represents risk or opportunity — is where real traders separate themselves from the crowd.

Right now, heading into 2026, the story of sector performance is clear. While AI-driven technology stocks continue to dominate market returns, several major sectors are significantly underperforming the broader market, even if some have posted modest positive returns.

The key laggards (relative to the S&P 500) are:

• Real Estate

• Consumer Staples

• Materials

• Energy

Below, we break down each sector’s performance accurately, explain the macro forces driving these moves, list the top 5 companies in each sector, and show how traders can apply a structured “buy the dip in leaders” strategy with CLiK discipline.

1. Understanding Today’s Market Climate (Late 2025)

Interest Rates & Monetary Policy

Markets expect the Federal Reserve to begin gradual rate cuts, but inflation remains sticky. This creates a mixed environment:

• Tough for rate-sensitive sectors like Real Estate, Utilities, and Staples

• Supportive later for cyclicals (Materials, Energy, Industrials) if growth strengthens

Inflation & Input Costs

Even with moderating inflation, wage and commodity pressures remain high — directly impacting:

• Consumer Staples margins

• Materials input costs

• Energy sector volatility

Global Growth & China Dependence

China’s uneven recovery affects industrial metals, chemicals, and commodity demand.

Market Positioning

The AI mega-cap rally continues to overshadow the rest of the market. While the S&P 500 is strongly positive, several sectors are flat to negative.

2. Real Estate: Rate-Sensitive and Still Under Pressure

Performance (Late 2025)

Real Estate remains one of the weakest sectors over the past 12 months, delivering negative returns relative to a strong S&P 500.

Why It’s Struggling

• Higher-for-longer yields are suppressing valuations

• Office space continues to face secular decline

• REIT (Real Estate Investment Trust) refinancing risk remains elevated

What to Expect

If rate cuts begin — even slowly — higher-quality REITs (healthcare, logistics, data centres) may start recovering.

Top 5 Real Estate Companies

1. Welltower (WELL)

2. Prologis (PLD)

3. American Tower (AMT)

4. Equinix (EQIX)

5. Simon Property Group (SPG)

CLiK View: Dip-buying here should focus on quality REITs only — avoid speculative office-heavy names.

3. Consumer Staples: Defensive… and Negative YTD

Performance (Late 2025)

The Consumer Staples Select Sector SPDR (XLP) is down approximately 3–4% YTD (ETF.com), not “barely positive.” This sector has underperformed significantly relative to the S&P 500.

Why It’s Weak

• Investors prefer high-growth tech over stable cashflows

• Rising input costs (commodities, wages) squeeze margins

• Valuations entered the year at the upper range

What to Expect

Staples shine when volatility rises or recession concerns grow — but they lag in strong bull markets.

Top 5 Consumer Staples Companies

1. Walmart (WMT)

2. Costco (COST)

3. Procter & Gamble (PG)

4. Coca-Cola (KO)

5. Philip Morris International (PM)

CLiK View: Great for defensive dips — but don’t expect tech-like returns.

4. Materials: Modestly Positive but Still Lagging the Market

Performance (Late 2025)

Contrary to previous drafts, the Materials sector has shown:

• ~6.0% YTD gains

• ~1.6% returns over the last 12 months(Source: Yahoo Finance, August 2025)

This is modestly positive, but still significantly underperforming the S&P 500, which is up double-digits.

Why It’s Weak Relative to the Index

• Global manufacturing softness

• China’s patchy recovery

• Volatile commodity/metal demand

• Capital flowing into tech instead of cyclicals

What to Expect

If 2026 sees reflation, infrastructure spending, or stronger global growth, Materials could see one of the biggest rebounds.

Top 5 Materials Companies

1. Linde (LIN)

2. Newmont (NEM)

3. Sherwin-Williams (SHW)

4. Ecolab (ECL)

5. Nucor (NUE)

CLiK View: LIN, SHW, ECL are the “quality leaders” — these are the stocks to watch for dip-buying opportunities.

5. Energy: Volatile, EPS Weakness, and Still Behind

Performance (Late 2025)

Energy performance has been mixed to slightly negative, depending on the index — but the more important story is:

• Energy had the weakest EPS growth of all sectors in Q3 2025 (0.3% y/y) (Source: DWS)

This indicates fundamental earnings weakness, not just price volatility.

Why It’s Struggling

• Range-bound oil prices

• Strong U.S. shale supply

• Transition pressures

• Market flows favouring AI/tech

What to Expect

Energy could rally strongly if:

• Global growth accelerates in 2026

• Oil inventories tighten

• OPEC+ supply discipline holds

Top 5 Energy Companies

1. Exxon Mobil (XOM)

2. Chevron (CVX)

3. ConocoPhillips (COP)

4. Williams Companies (WMB)

5. Marathon Petroleum (MPC)

CLiK View: Energy works best as a tactical macro trade — strong upside in the right conditions, but not a passive hold.

6. CLiK’s Buy-the-Dip Strategy for Underperforming Sectors

When sectors underperform, opportunities appear — but only if traders use structured rules, not emotion.

Step 1 — Identify Constructive Conditions

Look for:

• Improving relative strength

• Stabilising earnings projections

• Supportive macro trends (e.g., lower yields for REITs)

Step 2 — Focus on Leading Stocks

Criteria:

• Top quartile market cap

• Strong ROE (Return on Equity) and margins

• Solid institutional ownership

• Persistent long-term uptrend

• Clean balance sheets

Step 3 — Define a Proper Dip

A dip worth buying should be:

• 8–15% off recent highs

• Still above long-term trendlines

• Supported by stable fundamentals

• Free from credit/distress issues

Step 4 — Manage Risk Properly

• Diversify across 5–10 stocks per sector

• Set exits before entries

• Avoid overweighting any one theme

At CLiK, we always emphasise process-driven discipline — especially when evaluating lagging sectors.

7. What Traders Can Expect Heading Into 2026

Scenario A: Soft Landing + Rate Cuts (Most Likely)

Winners:

• Real Estate (quality REITs)

• Materials (quality cyclicals)

• Energy (if demand rises)

• Industrials

Scenario B: Sharp Growth Slowdown

Winners:

• Consumer Staples

• Health Care

• Utilities

• Selected premium REITs

Scenario C: Tech Loses Momentum

Capital rotates into:

• Industrials

• Materials

• Energy

• Financials

• High-quality REITs

Final Thoughts: Sector Rotation Is a Map — Not a Prediction Machine

Sector rotation isn’t about predicting every economic turn with perfection. It’s about recognising:

• where capital is flowing,

• where sectors are undervalued,

• where fundamentals are stabilising,

• and which companies inside those sectors are genuine leaders.

The current underperformance across Real Estate, Staples, Materials, and Energy offers opportunities, not warnings — provided traders apply structure, discipline, and risk management.

This is the core of CLiK Trading Education: structured learning, smart analysis, consistent process.